Do You Have the Right Long Term Care Insurance?

By Kimberly FowlerDecember 1, 2016

Long term care is a costly expense for most families, one that is usually paid for using Medicaid, private insurance or out-of-pocket savings. The challenge is that most middle and upper-middle class families do not qualify for Medicaid. These families may find that the out-of-pocket expenses for long term care can be crippling.

For this reason, many Americans are turning to insurance to cover their long term care expenses. Learn more about how to find the right long term care insurance (LTCI) policy for your family.

Is Long Term Care Insurance Right for You?

With so many different types of LTCI policies out there, choosing the right type of coverage can be challenging. There’s a lot to consider.

If you don’t have a LTCI policy already, should you get one? If you do have one, is it the right type of policy to cover your needs?

According to Barron’s Financial Investment News, statistics show that 70% of 65-year-olds today will need long-term care at some point in their life. Statistically speaking then, the odds that you or a family member will need long term care insurance are pretty high. However, you may not need LTCI if you:

Are independently wealthy: If you can afford to spend $100, 000 a year for a nursing home then you need not worry about LTCI — you may be better off to pay out-of-pocket.
Qualify for Medicaid: If you have little assets, income or savings, you may qualify for Medicaid which could pay for your nursing-home care.

However, “families in the top third of the wealth distribution, but below the top 1%,” or “anyone with $500,000 to $5 million in assets” should have LTCI, says Barron’s Financial News. “For them, a truly catastrophic event, like 20 years of care for an Alzheimer’s disease patient, could easily burn through their assets.”

How to Qualify for LTCI

A problem that some families run into is that they have some form of insurance, but find they don’t qualify when they feel it’s time to use it.

Although every policy is different, generally speaking, to qualify for LTCI a person must be unable to perform a pre-set number of basic daily living activities.

Although these activities and the definition of these activities vary by policy and insurance company, common examples include being:

Cognitively impaired to the point of requiring supervision
Incontinent
Unable to bathe, dress or eat independently
Unable to move to or from a bed or chair
Unable to use the washroom independently

How to Apply for LTCI

If you think you will need LTCI and don’t have it, then the time to apply is probably now. Like most insurance policies, the older you are the more you can expect to pay in premiums.

For example, a LTCI policy “purchased at 65 can be well over 50% more than an identical product bought at 55,” Barron’s Financial Investment News reports. “The sweet spot is in the late 50s… the price is still very affordable, and people are starting to think seriously about retirement.”

Health plays an important factor too. Like most insurance policies it’s better to apply when you’re healthy so you pay less in premiums. If you have some health concerns then you might not quality for insurance. Overall health is one of the reasons that 25% of applicants between 60-69 are denied LTCI coverage.

What a LTCI Policy Costs

Prices for LTCI depend on:

The type of benefits
Your age
Your family history
Your gender (women are more expensive to insure because they live longer)
Your health

The difference in prices varies greatly from one company to another and depend on factors like the type of benefits and your geographical location. Annual premiums could run anywhere from $2,000-$7,000 depending on a number of the abovementioned factors.

Keep in mind that insurance companies can increase their annual premiums. For example, in 2012, state insurance regulators in New Jersey granted Metlife’s request to increase LTCI premium rates by 20.5%. In 2014, state insurance regulators in Texas allowed Allianz to increase LTCI premium rates by 75%.

Types of LTCI Policies

The industry has changed the type of LTCI coverage offered over the years. Some earlier policies will only cover nursing-home expenses while newer policies may include adult day care, assisted living or home care.

Some policies pay a small cash stipend for care by a family member, which is the “most common and least expensive kind,” suggests Barron’s Financial News. “It is also the most comfortable and reassuring for the patient, and the choice that most people would make; to stay in their own homes.”

Some other common types of LTCI policies include:

Hybrid, or blended policies that combine LTCI with life insurance or annuities, that you can sometimes add a long-term care rider to your life insurance policy. These types of policies allow long-term care benefits to be paid out against the death benefit until it is exhausted.
Maximum life of a policy which covers a set number of years. Sometimes you can add unused daily costs (if you’re under the maximum daily rate) to the end of the policy to extend it’s life.
Maximum monetary benefits usually allows access to a maximum amount of funds per day. With this type of policy you can usually exit and re-enter long-term care until the maximum benefits are used up.
Shared policies for spouses allow you to share the maximum life policy with your spouse, but you don’t have to divide up the time equally. Premiums are usually more than a single policy but less than two individual LTCI policies.

What to Consider When Purchasing a Policy

According to US News, it’s important to consider the following when purchasing (or evaluating your current) LTCI:

Benefit amount: If your policy only pays $100 a day and you expect that memory care will cost $200 a day, then you will have a shortfall to deal with. Do some research into current costs and ensure that your benefit amount is enough to cover the care you think is important.
Eligibility: Do you have to be critically ill to be eligible for your policy? Do you have to be unable to independently complete a certain number of daily care activities? Understand the eligibility requirements of your policy and ensure they’re in line with your expectations.
The benefit period: Not all types of policies offer LTCI for life. Will the policy you have cover you for as long as you expect to need LTCI?
The elimination or waiting period: The time that you need to pay for LTCI before your policy kicks in. Ninety days is a typical waiting period.
Indemnity rider: When you add this rider to a LTCI policy the policy will pay the full daily care benefit no matter what the charges of your daily care actually are. This means that if you’re receiving long term care at home from someone who is not a family member then you may still receive the full daily benefit allowance.
Inflation: It’s important to take inflation into consideration for all aspects of your retirement plans, including insurance. Look for a LTCI policy that has a “compound inflation protection rider [which] will automatically increase your benefit amount each year by a stated percentage, such as 5 percent, without increasing your premium,” US News recommends.
Non-forfeiture clause: Allows you to receive reduced benefits if you can no longer pay your premiums after you’ve paid into the policy for a set number of years.
Tax qualified policies: Allow you to deduct premiums as medical expenses, but the rules surrounding taxes and your LTCI policy vary regionally so check with your accountant and financial advisor about the fine print in your policy and the tax implications.
Types of services covered: This is where a lot of seniors plans go awry. Many people assume their LTCI coverage will pay for assisted living, only to find out that it only covers nursing home care. Or, some seniors need some financial support to cover home care, but can only receive coverage if they move into an assisted living community. Ensure the policy you have is flexible enough to cover a variety of types of services because it’s hard to predict exactly what you’ll need in the future.
Waiver of premiums: Means you can stop paying premiums once you start using your policy. This is important to have as you don’t want to give your benefits back to your insurance company by way of continued premium costs.
Watch out for conditionally guaranteed policies: This means that the policy within a group (like employee benefits) could be cancelled, even if you’ve paid your premiums.

In addition to the policy itself, it’s important to look at the company providing the policy. Are they a reliable company that is unlikely to go under? Before purchasing a policy, you should check the financial rating of the insurance company you’re considering doing business with.

In addition to looking at how financially sound the company is, it’s important to also ask about the claims-paying history of the company and know how many LTCI policies the company has sold.

Watch out for new insurance companies or ones that are new to selling LTCI policies. Sometimes (but not always) it’s safest to go with a large insurance company which is financially stable and therefore less likely to raise your insurance premiums.

It’s critical that you factor this information into your decision about LTCI, including the types of policy and coverage options that are best for you.

This information is intended as a guide only. You should reach out to an accountant, elder law attorney, financial advisor or insurance broker about your options and unique situation.

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Kimberly Fowler